Federal Taxation of Qualified Dividends

Dividends Can be Taxed at Different Rates

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Qualified dividends are a type of investment income that's earned from stocks and mutual funds that contain stocks. They're a share of corporate profits that are paid out to investors. They're taxable income.

This presents some special considerations at tax time regarding filing rules and various applicable taxes.

Key Takeaways

  • A qualified dividend is one that you hold or own for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date.
  • Qualified dividends are taxed at long-term capital gains tax rates, which can be much kinder than ordinary income tax rates.
  • Mutual fund companies, brokers, and corporations should issue you a Form 1099-DIV after the end of the tax year, telling you (and the IRS) the amount of your qualified dividends.
  • You'll have to file Schedule B with your tax return if you have more than $1,500 in interest income and dividends.

What Is a Qualified Dividend? 

Dividends can be taxed at either ordinary income tax rates or at preferred long-term capital gains tax rates. Dividends that qualify for long-term capital gains tax rates are referred to as "qualified dividends."

Your dividends are qualified if you hold or own the stock for more than 60 days during a 121-day period that begins 60 days before the ex-dividend date. Ordinary dividends are more common. They should be clearly designated as such.

The holding period can be longer for preferred stock. These assets must be held for more than 91 days during a 181-day period that begins 90 days before the ex-dividend date. This rule applies if the dividends result from time periods of 367 days or more.

Tax Treatment of Qualified Dividends

Qualified dividends were taxed at rates of 0%, 15%, or 20% through the tax year 2017. The rate depended on the taxpayer's ordinary income tax bracket. Then the Tax Cuts and Jobs Act (TCJA) came along and changed things up effective January 2018.

The rates are set at 0%, 15%, and 20%, just as they have always been. But long-term gains have their own tax brackets as of the 2021 tax year (the return you'd file in 2022), thanks to the TCJA. You'll fall into the 0% long-term capital gains tax rate for qualified dividends if:

  • Your income is less than $40,400 if you're single
  • Your income is less than $80,800 if you're married and you file a joint return with your spouse
  • Your income is less than $54,100 if you qualify as head of household

The 15% tax bracket kicks in at incomes above these 0% thresholds and applies to incomes of up to:

  • $445,850 for single filers
  • $501,600 for married filers of joint returns
  • $473,750 for head of household filers

Only taxpayers with incomes in excess of these 15% thresholds are faced with the 20% capital gains tax rate as of 2021.

Ordinary dividends are taxed as ordinary income according to a taxpayer's regular, marginal tax bracket.

Other Types of Dividends

Ordinary dividends are taxed at the same rates as your salary, wages, or other earned income.

You might also receive dividends from a trust or an estate, from an S-corporation, or from a partnership. The transaction still represents dividends. The value must be reported on your tax return, regardless of whether the corporation or partnership pays you in cash, stock options, or tangible property. You should receive Schedule K-1 for dividends from these sources.

All other dividends are reported on Form 1099-DIV.

Reporting Dividend Income: Form 1099-DIV

Form 1099-DIV is issued to investors by mutual fund companies, brokers, and corporations when $10 or more in dividend income is paid out during the year. Form 1099-DIV reports dividends in the following places:

  • Box 1a: Ordinary dividends reflecting the total amount of dividends paid to you
  • Box 1b: Qualified dividends (the portion of total dividends that qualify for the preferred capital gains tax rate)
  • Box 3: Non-dividend distributions, which are a nontaxable return of capital

You can elect to have taxes withheld from your dividends. These amounts should appear in box 4.

Reporting on Form 1040

Report dividend income on your 2021 tax return in the following places:

  • Ordinary dividends are reported on Line 3b of your Form 1040.
  • Qualified dividends are reported on Line 3a of your Form 1040.

You can use the Qualified Dividends and Capital Gain Tax Worksheet found in the instructions for Form 1040 to figure out the tax on qualified dividends at the preferred tax rates.

Non-dividend distributions can reduce your cost basis in the stock by the amount of the distribution.

These lines and entries refer to the 2021 tax return that you'll file in 2022.

You must report dividend income on your tax return even if you don't receive a Form 1099-DIV for some reason. Dividends are taxable regardless. They must be reported even if you reinvest them, buying more stock.

Using Schedule B

Schedule B is a supplemental tax form used to list interest and dividend income from multiple sources. Using Schedule B is required if you have over $1,500 in interest income and dividends.

Part I details taxable interest earned. Part II pertains to ordinary dividends.

It can be helpful to use the form to tally up your interest and dividends for reporting on Form 1040, even if you're not required to file the form with your tax return. 

The Additional Medicare Surcharge

Dividend income can also prompt the Additional Medicare Tax. This tax has been in place since the 2013 tax year. It's in addition to any income tax you might pay on your dividends.

You must pay 0.9% of your net investment income toward this Medicare tax if you're married filing jointly and your modified adjusted gross income (MAGI) is $250,000 or more. You must pay it if you're married filing separately and your MAGI is more than $125,000. The income threshold for all other taxpayers is $200,000.

The Net Investment Income Tax

The Net Investment Income Tax is a heartier 3.8%. It kicks in at the income thresholds of your net investment income, or at the same $250,000/$125,000/$200,000 limits as the Additional Medicare Tax, whichever is less.

All taxable dividends are investment income, even if they're taxed at ordinary rates.

Tax laws change periodically. You should always consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice. It's not a substitute for tax advice.

Frequently Asked Questions (FAQs)

How are dividends taxed by states?

Most states tax dividends as normal income, so you'll pay the same rate on dividends as you do on the rest of your income. New Hampshire taxes all dividends at 5%, regardless of income level. But this tax is being phased out. It should be entirely repealed beginning January 1, 2027.

How often are dividends paid?

Aside from real estate investment trusts (REITs), most businesses have a lot of freedom as to how often they pay out dividends, when they choose to do so, and how much that payment will be. Many companies that offer dividends do so quarterly. But this isn't a requirement. They can change their plans at any time up until the dividend is announced.

What are Section 199a dividends?

Section 199a deductions were introduced by the Tax Cuts and Jobs Act that went into effect in 2018. The TCJA allows individual taxpayers to deduct up to 20% of qualified dividends from domestic REITs and income from public partnerships.

Article Sources

  1. Internal Revenue Service. "Topic No. 404 Dividends."

  2. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 19.

  3. Tax Foundation. "2021 Tax Brackets."

  4. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 5.

  5. Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 3.

  6. IRS. "Form 1099-DIV Dividends and Distributions."

  7. Internal Revenue Service. "Tax Year 2021 1040 (and 1040-SR) Instructions," Pages 36.

  8. Internal Revenue Service. "How Are Reinvested Dividends Reported on My Tax Return?"

  9. Internal Revenue Service. "2021 Instructions for Schedule B," Page 1.

  10. Internal Revenue Service. "Topic No. 560 Additional Medicare Tax."

  11. Internal Revenue Service. "Find Out If Net Investment Income Tax Applies to You." Dec. 20, 2021.

  12. New Hampshire Department of Revenue Administration. "Frequently Asked Questions—Interest & Dividend Tax."

  13. Internal Revenue Service. "Tax Cuts and Jobs Act, Provision 11011 Section 199A—Qualified Business Income Deduction FAQs."